Gold Falls Below $1,600 as Deflation Fears Emerge

Gold prices tumbled Thursday, on the verge of wiping out this year's gains as renewed fears of a global economic slowdown and disappointment over a lack of aggressive U.S. Federal Reserve stimulus dampened bullion's inflation-hedge appeal.

The sell-off started Wednesday when the Fed ended its policy meeting without launching a new round of monetary easing but instead opted to lengthen its program aimed at lowering long-term interest rates known as "Operation Twist."

Silver slid more than 4 percent, following Brent crude oil, which tumbled over 3 percent to an 18-month low and steep losses on Wall Street.

Thursday's sell-off in assets across the board amid a dimmer economic outlook lessened the need of buying gold to hedge against inflation.

Deflation worries pummeled precious metals after several reports showed disappointing U.S manufacturing activity, a shrinking Chinese factory sector and slowing business activity across the eurozone. The data added to fears that Europe's debt crisis and slower growth in the United States and Asia would cause downturns around the globe.

"When you see slowdown in China and in the United States and the debt crisis accelerate in Europe, it leads people to believe that we will have significant depreciation, especially when commodities and precious metals prices have been so tied into the monetary policy," said Jeffrey Sica, chief investment officer at SICA Wealth Management LLC, which oversees $1 billion in assets.

Spot gold fell 2.6 percent to $1,564.40 an ounce by 1:39 p.m. EDT (1739 GMT), having earlier hit a low of $1,563.88 an ounce. Earlier in the session, bullion prices were on the brink of turning negative for the year compared with last year's close at $1,563.80 on Dec. 30. The metal briefly broke below $1,530 in mid-May, and it is a long way off the record high of $1,920.30 an ounce hit last year.

U.S. Comex gold futures for August delivery dropped 3.1 percent, or $50.30, to $1,565.50 an ounce on the Comex in New York, the biggest drop since April 4.

Silver was down 4.4 percent to $26.85 an ounce.

Technical selling also pressured bullion prices once they broke below $1,580 an ounce, a level of decent support recently. Analysts said the metal could fall further in absence of near-term support.

Gold fell 0.5 percent in choppy trade on Wednesday as investors digested news that the Fed was extending its effort to depress borrowing costs by selling short-term bonds and buy longer-dated ones -- known as "Operation Twist" -- by $267 billion through the end of the year.

"Yesterday's Fed announcement...was modestly disappointing for those traders who had bought gold in anticipation of more help from the Fed," said Mark Luschini, chief investment strategist of Janney Montgomery Scott, a broker-dealer with $54 billion in assets.

"I can see gold go back down to the mid $1,500s," he said.

Gold was up 15 percent for the year after the Fed in January pledged to keep interest rates near zero until at least late 2014. Gold has since tumbled several times, however, after Bernanke mentioned no further easing in his congressional testimonies.

Weak physical demand also weighed, as bullion gold traders in India kept to the sidelines looking for a bigger retreat in spot prices. The rupee's fall to a record low against the dollar kept prices high in India, the world's biggest consumer of gold.